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International Finance

7. In 1990, General Electric acquired Tungsram Ltd., a Hungarian light bulb manufacturer. Hungary's inflation rate was 28% in 1990 and 35% in 1991, while the forint (Hungary's currency) was devalued 5% and 15%, respectively, during those years. Corresponding inflation for the U.S. was 6.1% in 1990 and 3.1% in 1991.

a. What has happened to the competitiveness of GE's Hungarian operations during 1990 and 1991? Explain.

b. In early 1992, GE announced that it would cut back its capital investment in Tungsram. What might have been the purpose of GE's publicly announced cutback?

Solution Preview

a. What has happened to the competitiveness of GE's Hungarian operations during 1990 and 1991? Explain.

ANSWER. Since forint devaluations haven't kept pace with Hungary's roaring inflation, we know that the forint's real exchange rate has risen. Specifically, if the nominal exchange rate (dollar value of the forint) at the start of 1990 was e0, the forint's real value at the end of 1991 ...

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